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Final Salary pensions hit by Government changes

10 July 2010 / by Lois Avery

Final Salary Pension Schemes will fall in value following a small change made by the Government, it has been revealed.

As part of their Emergency Budget measures to reform pensions the new coalition decided to switch the index that measures how pensions are calculated from RPI (retail price index) to CPI (consumer price index.)

CPI is typically lower than RPI, meaning the government will save money on inflationary rises in the cost of these pension schemes.

The Chancellor announced the changes in last month’s budget where he said that pensions would be subject to this change, which will come into force from January 2011.

But new calculations show that pensioners will lose out because the small change could make a big difference to pension savings over time.

According to the Daily Mail, a pension pot of £10,000 would be worth just over £27,000 in 2030 if linked to RPI, but it reaches just £19,000 against CPI. A difference over 20 years of £8,000.

Final Salary Schemes, which give pensions based on an employee's salary at retirement, have already been under threat for being too costly, with most large companies closing the schemes to new employees.

But for those with money locked in this type of pension the value of their savings looks set to plummet.

Liberal Democrat pensions minister Steve Webb, who backed the move from RPI to CPI, has been criticised for robbing pensioners of extra income.

Brendan Barber, TUC general secretary, said recently: “Changing just one letter from R to C shaves a little off pension increases most years but soon mounts up to reduce an average public sector pension of £5,500 to £4,845 over 20 years.”

However, Neil Carberry, of the Confederation of Business, says it is a good move: "Statutory indexation is the biggest single regulatory cost borne by final salary schemes. That makes getting it right important.

"As CPI is a more accurate reflector of inflation for pensioners than RPI, we welcome this announcement," he said.

"We hope that the Government will also table overriding legislation, to ensure that schemes whose rules currently prevent them from taking advantage of this change can do so."